The Prudent Associate’s Guide to Bad Faith Strategy, Part 1

This article is intended to be Part 1 of a 3-part series.  This Part will discuss fundamentals of bad faith, with the second to focus on the demand and litigation phases, and the third pertaining to trial considerations, post-judgment discussions, and other considerations.

Introduction

When I started working as a Plaintiff’s civil trial attorney, myths of bad faith verdicts of the past echoed through the hallways of my firm, with memorabilia of trial verdicts jeweling the walls of the corridors. Getting a carrier to pay above the policies limits, due to their own conduct towards their own client, is the associate’s golden ticket to trial.  The fare for entry to the Plaintiff trial attorney’s promise land.

Despite its importance, a tangible description of what constituted bad faith often evaded me during my initial year as a civil trial attorney. I knew the basics.  Policy Limits.  Demand.  Litigation. Discovery. 998 issued. 998 expires. Verdict. Judgment. Bad faith. Still, a true understanding of what constituted bad faith remained a bit of a mystery for some time.  So let’s talk first about what we know:

Party A pays a premium for “insurance coverage.”  Party B is injured by Party A.  Party B (“the injured party”) submits a claim for injury and damages and demands Part A’s policy limits. Reasonable [and unreasonable] minds disagree.  Party B proceeds with the filing of a complaint. The parties discover and dispute the factual allegations via written discovery followed by depositions.  Once the primary depositions are complete, Counsel for Party B sends a Code of Civil Procedure 998 “Offer to Compromise” (“998”) for the available policy limits. Opposing counsel either ignores or objects to the 998. Party A and Party B later try the case. Party B prevails and receives a judgment in excess of the policy limits.  Party A yells at Party C (“the insurance carrier”), pleading with it for an explanation as to why Party A had the insurance in the first place if Party C was unwilling to protect Party A when they actually needed protection. Party A promptly assigns their prospective bad faith lawsuit to Party B.
Boom.

Bad Faith. Magic.

Even with this “clean” bad faith fact pattern, the prudent associate should be asking themselves several questions before they head down to the boss’ office. In fact, your full analysis should and must include an evaluation of at least two key issues: 1) what is the nature of the contract (e.g., engagement letter, policy of insurance, etc.) between the involved parties, including but not limited to those between the insured(s), insured’s counsel, and the insurance carrier(s); and 2) what have those parties done since the occurrence of the incident that can be objectively seen as an unreasonable execution of their contractual, statutory, and common law duties.

What is “Bad Faith”?

In practice, “bad faith” is typically seen, at least initially, as a contractual cause of action that one contracting party (e.g., the “insured”) may bring against another contracting party (e.g., the “insurance carrier”). As explained by this article, the prudent associate will find this to be a limiting view, and ultimately, an inaccurate interpretation of what makes up a truly righteous bad faith claim. (See Graciano v. Mercury General Corp. (2014) 231 Cal.App.4th 414, 425 and 433.See also CACI 2234, CACI 601, CACI 4106, CACI 325, CACI 1900, CACI 1903.See generally Administrative Code, Code of Reg. § 2695.1, et seq. – “Fair Claims Settlement Practices Regulations”.)

Hitting the “Reasonableness” Target

To answer this question, we start with CACI 2234, sub-instruction number 4, which states that the jury must find “[t]hat the [Defendant Carrier’s] failure to accept the settlement demand was the result of unreasonable conduct . . .”

So, what does “unreasonable conduct” look like?

CACI 2334 states, in part,

“A settlement demand for an amount within policy limits is reasonable if [the carrier] knew or should have known at the time the demand was rejected that a potential judgment against [Plaintiff] was likely to exceed the amount of the demand based on [Plaintiff]’s injuries or losses and [Plaintiff]’s probable liability.”

Even with these “clear instructions”, the prudent associate knows that the demand and rejection of the demand, alone, are not enough sufficient to bring to the boss. (See Pinto v. Farmers Ins. Exchange (2021) 61 Cal.App.5th 676, 688 [“[T]he crucial issue is . . . the basis for the insurer’s decision to reject an offer of settlement.], emphasis added.) Several other factors remain available to the prudent associate.  For example, “[a]n insurance company’s unreasonable conduct may be shown by action or by the failure to act.” Even more, “[a]n insurance company’s conduct is unreasonable when, for example, it does not give at least as much consideration to the interests of the insured as it gives to its own interests.” (See Id.) Another factor is the size of the future judgment.  As stated by the Crisci Court, “[t]he size of the judgment recovered in the personal injury action when it exceeds the policy limits, although not conclusive, furnishes an inference that the value of the claim is the equivalent of the amount of the judgment and that acceptance of an offer within those limits was the most reasonable method of dealing with the claim.” (Crisci v. Security Insurance Co. of New Haven, Connecticut (“Crisci”) (1967) 66 Cal.2d 425, 431.

These, and other factors, are well founded in California state law. (See Comunale v. Traders & General Ins. Co. (1958) 50 Cal.2d 654, 659; Crisci v. Security Insurance Co. of New Haven, Connecticut (1967) 66 Cal.2d 425, 429; Johansen v. California State Auto. Assn. Inter-Insurance Bureau (1975) 15 Cal.3d 9, 16; Hamilton v. Maryland Cas. Co. (2002) 27 Cal.4th 718, 724-725; Rappaport-Scott v. Interinsurance Exch. of the Auto. Club (2007) 146 Cal.App.4th 831, 836. See also Administrative Code, Code of Reg. § 2695.1, et seq. – “Fair Claims Settlement Practices Regulations”), etc.

The Basics – Writing and Documentation

But what is “reasonableness” in practice, and more importantly, how can a prudent associate go about finding and developing the evidence needed for a prospective bad faith claim?

First, if your legal practice is not “in the practice” of writing A LOT of “custom” correspondence for your cases, the strategies detailed in this article may not work with your business model.  However, if you are looking to pursue these types of matters, the written word will always be your primary asset.  This is a tool that must be utilized and developed to document and provide a written record of Plaintiff’s counsel’s perception of the litigation from “behind the pleading curtains.”

This written record, serves, in effect, as a timeline of issues for the fact finder (i.e., judge or jury) to focus on at the later bad faith trial.  Compare it to you getting those phone records from the adverse driver in your third-party auto case that proves they were texting while driving.  That is what your writing and correspondence will be for that same third-party’s future bad faith attorney.

The need for documentation cannot be understated. With that in mind, professionalism and “good writing” are the name of the game.  Assume all correspondence will be placed under the microscope, that you will be judged by it, and act accordingly.

Prior to Battle – Divide Before You Conquer

Though I would say the mantra of this article has been to always develop and be on the search for additional facts to support any prospective future allegations of bad faith.  Without a doubt, and for all that is loved and cherished, preserve and memorialize your actions on the written record! If you do not, the fact finder will assume it did not happen.

Still . . . the most important goal remains: make sure the written record reflects that Plaintiff’s counsel acted reasonably over the course of litigation, and that you have highlighted the events where counsel hired by the insurer or the insurer itself did not.

This is not anything new, improper, or mischievous.  Rather, it all comes down to documentation and deadlines.  At the end of the day, let the Code be your North Star. Repeat after me: “just follow the Code!”

Before we get there, I would argue that the associate’s next step would be to collect as much information as possible relative to the parties involved in the suit, including their representatives and carriers.  I typically start this process at the beginning of a case.  I identify the “inside counsel” attorney (e.g., USAA, AAA, etc.), the “outside counsel” attorney (e.g. State Farm), their respective employers (i.e., the insurance carriers) and review for excess or umbrella coverage representation (…and their respective carriers).  For cases involving multiple coverages, conflicts of interest, or attorneys retained by the insured, monitoring counsel, etc., I make an additional note for documentation purposes (i.e., CCing them on all pertinent coverage or offer-related emails and letters).  I may also include their information in the eventual 998, agreeing to their dismissal with prejudice, if the 998 is accepted by the co-defendant.

To that effect, this is as good a place as any to note that these types of cases often include parties with conflicting positions and defenses.  Spread those conflicts across multiple different sets of priorities, obligations and duties (i.e., the attorney’s duty to the insured, the carrier, etc. for starters), the environment is fraught with potential tensions and disagreements. (See Highlands Ins. Co. v. Continental Cas. Co. (9th Cir. 1995) 64 F.3d 514, 518; Aetna Cas & Sur Co v Superior Court (1980) 114 Cal.App.3d 49.)

But let me pause here to state, once again – I am not advocating for you to go and declare war on anyone, despite some of the language in this article suggesting the contrary.  The point here is to ensure that you note, to your and your client’s advantage, the differences between the different parties through the taking of written discovery and depositions.  (See Johansen v. California State Auto. Assn. Inter-Ins. Bureau (1975) 15 Cal.3d 9, 12 [stating that insurer may not consider coverage defenses in evaluating reasonable settlement demands within policy limits].) Accentuating the factual circumstances, contractual rights, and statutory obligations of the parties involved is not improper conduct. Rather, I would think you are doing a disservice to your client AND the relevant third party if you do this, with the obvious caveat that such a tact is not always necessary in every cases.

In Closing

Now that we have covered the basics, Part II will discuss third-party demand and litigation strategies the prudent associate can use to preserve a potential future bad faith claim.